SKI Gold Stock Prediction

presented by Jeffrey Kern, Ph.D.

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Jeff Kern, P.H.D.
Jeff Kern, Ph.D. » Read Bio


Testimonial
  • Hi Jeff, This comes from a person (ME) who has spent thousands of hours charting. I can honestly say that your system is amazingly accurate. I have been about 80-85% accurate on my very short-term calls using Fibonacci retracement, candles, and various other tools. Yet, I have taken plenty of abuse over the years. I can tell you NO one can appreciate your work more than I do …Congratulations and thanks Jeff for your masterful system and many thanks from a fellow technician!!

    Sal (Salscandle on the YahooBoards)




Primer on Investment Options

The SKI indices describe and predict the behavior of the general universe of precious metals shares (stocks) as represented by the price of broad-based mutual funds and gold indices such as the HUI and the XAU. To the degree that the movements in gold stocks are related to the movement of gold bullion (futures and options), the indices can also be extrapolated to the gold market. The indices’ precision will therefore be diminished as one moves from mutual funds, to gold, and to individual stocks. Readers certainly also use the indices for options trading, but personally I consider options to be among the riskiest of investments. On the other hand, risk is related to reward; A fairly conservative strategy is to buy precious metals mutual funds that are, nonetheless, still highly volatile relative to stock funds that invest in a broad spectrum of stock sectors. Higher rates of return are possible using leveraging strategies (margin financing), options, and futures. Personally, I tend to be conservative and wish to avoid loss at the risk of missing gains. However, in a true SKI bull market (beginning 8/09/05), one has to be more willing to sit through declines, buy into such signals, and consider leveraging risks versus rewards.

The following provides some basic information on each asset class

Mutual Funds

Mutual funds allow you to buy a broad basket of precious metals stocks without worrying about fills, bid/ask spreads, or intra-day timing. One simply receives the day’s closing price. The SKI indices are calculated using only the day’s closing price and are not designed to directly suggest intra-day movements (although it is interesting to watch an intra-day reversal that causes prices to close in the anticipated direction). The drawbacks of the mutual funds include: (1) Being unable to change an investment at prices other than the closing prices, (2) Many funds charge redemption fees, including fees for “short-term trading” (trades that are completed in a month or even 3 months may be considered “short-term trading” with fees ranging from zero to 2%), and (3) Funds gradually take some of the investors’ monies to pay for expenses (ranging between about 1-2% per year).

USERX is the symbol for U.S. Global Investor’s (used to be United Services) Gold Shares Fund. This fund is the oldest gold mutual fund in the United States (since 1974), thereby providing the historical data for analysis. I do not have any affiliation with this mutual fund EXCEPT: (1) I invest my money in USERX, and (2) U.S. Global Investors may have a paid banner advertisement on this site to link to all of their mutual funds. Interesting, USERX is usually relegated to second-status relative to its newer sister fund, the World Precious Metals Fund (UNWPX), that is widely recommended in gold newsletters. Note that USERX was issued in 1974 in the $40 area, fell to $11 in 1976, and rose to approximately $100 in 1980, as compared to its current area of only $10. I believe that I have seen it referenced as being one of the worst performing mutual funds over a long time span. Gold stocks are generally NOT an investment to buy and hold UNLESS they are in true SKI bull market. Even then, the bull runs can come to an abrupt end. USERX has recently increased their short-term trading fee (30 days or less) to .5% of the assets redeemed and have banned traders who use brokerage accounts to execute multiple “short-term” trades in their apparent effort to encourage only longer-term traders (I usually say that everyone is a trader, everyone eventually decides that it’s time to liquidate an investment, it’s just a matter of one’s time frame; but that was probably stated more eloquently by someone else, many years ago). They also require the placement of a buy/sell order more than one hour prior to the close of trading each day (e.g., prior to noon PST). The links to many precious metal mutual funds are provided here: GOLDMUTUALFUNDLIST

Stocks

I do not make recommendations regarding individual stocks but I do follow the charts of most precious metals shares. Their individual performances are less predictable than mutual funds or broad-based measures, but can provide higher rewards, particularly the low-priced precious metals stocks that should perform particularly well near the end-stages of a true bull market. There are many newsletters recommending some individual stocks over others. As an alternative to a mutual fund, and as a way of decreasing your total fees/commissions, some investors opt to develop a portfolio of individual stocks. Consistent with traditional investment advice, I’d recommend at least 10 gold stocks. One can also choose to mimic mutual funds by buying their top 10 or 25 holdings. Some brokerage accounts allow you to press a single “portfolio” button to buy and sell all of the stocks within your portfolio. One can also develop a portfolio that attempts to mimic the XAU index or preferably, the HUI index. Some mutual funds also attempt to mimic the XAU index (e.g., PMPIX and RYPMX).

Options

These represent a high-risk and high-reward alternative investment vehicle whose value depreciates over time. Their primary advantage is that the investment risk is limited to the purchase price of the option. Purchasing options as their price is plunging into a SKI buy signal will often produce rapid and large percentage gains. Nonetheless, when the price skyrockets in the short-term, it is wise to bank the large percentage profits. Options on individual stocks and the XAU are available, but suffer from some liquidity concerns. I do not provide specific recommendations on options, but some readers prefer their leverage and limited loss potential.

Precious Metals

Purchases of physical gold and/or silver bars and coins are probably the most conservative investment vehicle. These are also usually most appropriate for very long-term time frames. There are many bullion dealers on the web or one can purchase gold ETFs, GLD or IAU, on the U.S. stock markets.



Beliefs of Successful Market Timers

Successful market timers, meaning profitable market timers, have several "common" beliefs that help them achieve consistent profits. On the flip side of this, those who are unsuccessful also have a set of common beliefs. It is a good idea to know which beliefs will help you to succeed and which ones you may have, that need to be changed.

1. I will not jump into a trade before or after a signal just so that I can be participating.

2. I recognize that discipline is not a concept, it is an absolute necessity. The markets have a way of removing money from undisciplined market timers.

3. I realize that what happens today, this week, or even this month, is not what is important. What "is" important is my success over time.

4. I realize that losses are part of trading. No strategy is without losses.

5. I accept that sometimes my investments will under perform the market, knowing that over time, they will outperform the market.

6. I know that following a timing strategy through good times and bad are what will make me successful.

7. I can follow a strategy for the long haul and stick with it even when at times it is discouraging.

8. I accept that following a timing strategy will require me to make some fast trades that may seem like mistakes. A string of several successive small losses will not make me quit.

9. I can ignore the mass media which raises emotions and thus increases the risk of not executing a trade. It is often the trade that is hardest to take, that winds up being the most profitable.

10. The markets provide a constant stream of opportunities. If I miss an opportunity, another one will follow.

11. Keeping losses small and letting profits ride is not just a Wall Street saying.



Beliefs of Unsuccessful Market Timers

1. I must be trading all of the time to be successful. I am uncomfortable when in cash.

2. If my strategy is not doing what I think it should, I will make a change immediately.

3. If I lose on this trade, I feel like a loser.

4. If the market is rallying, I must get in even though my strategy gave no signal for it.

5. I am unlucky.

6. I get very upset when I miss a rally, or if I am in a bullish position when the market is declining.

7. I dread adverse new events and constantly worry that something will happen to make the markets go against me.

8. I can't afford to lose anything on this buy or sell signal.

9. I can't go broke taking small quick profits.

10. When this losing trade gets back to even, I'll dump it.



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